Excerpts from Money Morning Publication:
Well, today, below, I'll make a radical suggestion: you should entirely re-think the basis of Australia's epic resources bull market.
You can scroll down right now and take a look at exactly why I think this is the case if you'd like – but I'd like to take a minute or two to explain why I'm doing this...
When I brought The Daily Reckoning to Australia some four and a half years ago, I did so because I saw the single most exciting investment market in the Western world – and wanted to be a part of it.
This is where the commodities story met the China story. It was (and still is) ground zero for serious 21st century investors.
I'd watched from my posts in London and Paris as companies like BHP, RIO and Woodside made three figure gains for shareholders in a few short years. I was eager to see firsthand how the thousands of smaller, unheralded Aussie miners and explorers would benefit from unprecedented Chinese demand for Australian natural resources.
As a former small cap analyst, I knew that if you want to make really big money in a boom, going small is the way to do it. It was, professionally and personally, the best move I've ever made.
Back home in the U.S. my friends told me I was crazy. U.S. stocks were rising. U.S. house prices were rising. Why give up all that (and cheap beer to boot) to go croc hunting and koala hugging 'Down Under?'
But having written about the big picture in my newsletter at the time (Strategic Investment), I knew the American economy was a busted flush. The decision to move my publishing business thousands of kilometres to Australia remains one of my proudest (and best-timed) achievements. In investment terms, it was a good trade.
But you probably already knew that. It's been one hell of a ride for Aussie investors over the last decade. For the most part, an upward one. Even the financial crisis that devastated the rest of the developed world hasn't really bitten down hard here (at least not in an obvious way...yet).
And for that you can thank unrelenting Chinese demand.
But after analysing the situation carefully over the last year, I'm ready to make my move. And it is not a half-measure.
If you scroll down you'll see for yourself the specific, urgent action I think you need to take, right now.
I'll be honest with you. When I moved here, it was never my intention to get back in the game of writing actionable investment advice each week.
I always saw my role here as a commentator... to paint a picture for you, one which you can draw your own conclusions from.
That was a good plan, but things have changed in two ways:
First, what I see fast approaching (as soon as this year)is just too important a development to ignore for Australian investors.
Second, I've already started moving my own money to counter this global threat. This is what my recent trip to Baltimore was all about. If it was important enough for me to make a change, I reckoned it was something you might want to know about too.
A major change is coming in the global economy – one that could hit Australia especially hard – and I've personally begun preparing for it. I think you should, too.
And yes, this IS personal.
More than 50,000 Australians read The Daily Reckoning every day. Almost the same number read Money Morning.
That's more like-minds than I EVER thought we'd find here.
Call me old fashioned, but I believe like-minded friends have a duty to share their best advice with each other.
Also – your friends are usually the only people willing to tell you news you don't want to hear.
So that's what I'm doing. And why I'm doing it. I hope you'll take it in the spirit it's offered.
And I really hope you can spare a few minutes right now to have a read of my letter below – then take the action I recommend at the end.
Please understand: I wouldn't be doing this if I didn't think I was right...
My very best regards,
Dan Denning
Publisher
--------------------------------------------------------------------------------
Exit the Dragon
The investments you need to ditch now – or China's 2010 collapse could clean you out
REVEALED IN THIS MUST-READ LETTER...
Why at least ONE THIRD of your private wealth and 107,000 Aussie jobs are under imminent threat: discover why the most basic assumption behind Australia's 'miracle economy' is about to be proven catastrophically wrong... and what you stand to lose when China's real estate bubble bursts this year...
Ghost towns, theme parks and enough empty Beijing offices to fill 35,612 tennis courts: Revealed – what's REALLY driving the Chinese property boom... and why you're staking your financial future on bogus demand...
Two 'evasive' investments you need to make urgently: discover the Aussie investments you need to ditch now... and two to move your money into quickly – if you want to shelter your wealth from the fallout while everyone else comes undone...
AUTUMN 2010
Dear Friend,
When any relationship ends, it's painful.
"The worst part," said a close friend at The Lord Cardigan restaurant in Albert Park, Melbourne the other night, "isn't the break-up itself..."
"It's the moment you first realise you've been deceived."
His eyes narrowed...
"You breeze along happily, believing everything's okay, loving everything about your life... and all the while, behind the scenes, you're being duped.
"The moment you find out things aren't what you thought they were – that's what hurts the most. It's the deception. Nothing prepares you for the shock..."
I did what I thought a friend should: I offered words of condolence and support, made sure his glass was regularly topped up, and picked up the bill at the end of the night.
I felt awful: I couldn't warn my friend that the most important relationship in his life was under threat.
But I CAN warn you. You see...
Like my friend, you've been breezing along
in a relationship you think is wonderful
This relationship provides you with great returns on your private share portfolio and your super.
It gives the state you live in money to build roads, offer healthcare and provide jobs. It keeps the value of the dollar in your pocket strong. It saved Australia from a recession last year. And it has underpinned our economic growth for the past decade.
You may not even realise you're in this relationship. You may take all of the above benefits for granted.
But you are in this. EVERY Australian is.
And today I'm writing to tell you: we're being duped.
Things are not as you think they are. This relationship is on shaky ground. And today I want to reveal the extent of this deception to you before any kind of 'separation' is announced.
Because believe me, when that comes later this year, if you're not financially prepared for it, you'll need more than a free meal and a few words of condolence to see you right...
I'm talking about Australia's – and your – relationship with China.
"Ah!" You might be thinking...
"But I'm not in a relationship with China!"
Oh, but you are, whether you like it or not!
Let me show you just how strong your relationship with China is...
Take a look at the pie chart to the right. This is the ASX – the Aussie stock market – broken down into its component sectors. I've circled three sectors for you: Materials, Industrials and Energy. (Source: S&P equity indices)
These three sectors contain the stocks that have benefited most from the China building boom: exports of Aussie materials and energy, and mining operations that dig resources out of the ground to send to Chinese construction firms.
What does this mean to you?
Well, these three sectors make up 39 percent of the entire Aussie stock market. If you're an investor, the chances are that at least 39 percent of your money is being staked on China's continuing growth. In reality, it's probably way more than that.
Resource, materials, energy and mining stocks are what most half decent investment advisers, your colleagues at work, your mates down the pub – even your Granny would urge you to buy right now.
And if you leave your investment decisions to a fund manager (highly likely) your portfolio is more than likely flooded with these stocks, whether you realise it or not.
Now here's the thing about these companies you're invested in:
They are all riding high on the China boom
"Pinning our economy to China comes at a price. We believe [there will be] a slowing in demand for resources over 2010 and as a result prices will come off. Of course, with resource stocks making up almost 40 percent of the Australian stock market, this will mean a bumpy ride."
Paul Winter, Equity Strategist
Investors Mutual Limited
We pile into these stocks because of huge Chinese demand for our natural resources.
Total resource exports to China were worth AU$42,353,000,000 to the Australian economy in 2009.
That's an increase of 31 percent on the previous year.
The only other country that increased its imports of Aussie raw materials in 2009 was India – by a much smaller 7.2 percent.
All other trading partners cut their orders of Australian resources in the same 12 month period.
Look at the graph to the right. See how China has now overtaken Japan as our main trading partner. (Source: Australian Government Dept of Foreign Affairs
and Trade)
A lot of Aussie resource stocks – including many of the ones you may own – have gone up on the back of this Chinese demand. And a lot of people have made a lot of money quickly.
Check out the charts (right).
Look at the 10 year performance of leading Aussie resource stocks BHP Billiton, Rio Tinto and Woodside Petroleum (03/00 – 03/10).
These stocks have gone to the MOON over the past decade (aside from a small but significant blip I'll get to in a moment).
Bottom line: This is why your fund manager is furiously loading up on resource shares on your behalf... maybe even as you're reading this...
My advice today:
Pick up the phone.
Tell him to stop.
Why?
Because these stocks and hundreds more like them will plummet like an anvil in a Roadrunner cartoon when the China bubble bursts
Whoa there just a second...
Why would China stop buying Aussie resources? Don't the Chinese want 400 new cities by 2020? What are they going to build them out of – marshmallow?
I know this goes against the grain. The idea of China suddenly saying: "stop the cranes – we're big enough now" is fanciful to say the least.
But here's my point: I don't think they'll have a choice when their real estate bubble bursts.
My friend, there's much more to China's seemingly relentless growth than meets the eye. And that means one of the most basic assumptions behind Australia's 'miracle economy' could soon be proven catastrophically wrong. If you have even a shred of interest in your future financial security, I urge you to spare me the next five minutes of your time...
You won't read a more valuable
letter in the next 10 years
You may have already figured out what's at stake for your own wealth in the event of a China collapse. If you haven't, I'm about to spell it out for you – so you may want to pour yourself a stiff drink before you read any further.
But first I want to make a very important point:
There IS an exit strategy on the table for you today. That's why I'm writing. You can 'invest your way around' the coming storm – as long as you're a) smart and b) quick.
In this letter I'll explain exactly what you need to do now to protect your wealth from the effects of China's real estate bubble bursting. I've identified two investments that are natural hedge positions against any decline in China's imports of our natural resources. I want to tell you about them today.
Take my advice and you could avoid the hassle and heartache that most Aussie investors will stumble blindly into (because they don't know it's coming). Better than that: you should even turn a PROFIT while everyone else is struggling to make sense of what's going on.
Let me be absolutely clear: you will not get this warning anywhere else. Too many people in the financial services industry have a vested interest in the China growth story. The last thing they want you to do is move any money out of Aussie resource stocks.
But I'm 100% independent, I don't have a vested interest in your cash, plus I have a track record for spotting this kind of thing. I'll explain more about me, and my 'Exit the Dragon' strategy in a moment. First, you need to know:
Why much of the demand for Aussie resources you've built your investment strategy around is BOGUS
I said earlier that one of the most basic assumptions behind Australia's 'miracle economy' is about to be proven wrong.
The assumption is that China is hooked on economic growth.
It isn't. If you take only one thing away from this letter, let it be this: China's expansion is POLITICALLY – not economically – motivated. This is NOT about economic growth; it's about political stability... stability at ANY cost.
"It [has become] rational for [Chinese]state and non-state actors to spend much more effort on politics and much less effort calculating market risks and rewards."
Robert Gottliebsen
Business Spectator
This finally became clear to me on 12th February this year. The Chinese showed their hand – and the alarm bells began clanging. Right now they're clanging louder than the chimes of St. Peter's Basilica at midnight on Christmas Eve.
My message to you today is clear:
You are gambling your returns – maybe even your retirement security – on the political whims of an irrational overseas communist government.
This bogus demand for resources has created a real estate bubble in China.
James Rickards, former general counsel of hedge fund Long-Term Capital Management calls it "the greatest bubble in history with the most massive misallocation of wealth..."
Stephen Green, an economist at International Bank says: "We believe we now have a bubble in many [Chinese] cities, particularly the big ones..."
Jim Chanos, President of Kynikos Associates says: "I see all the signs of a credit induced real estate bubble that I think is going to be a doozy..." Worryingly, he concludes: "I'd be very leery of companies who are exporting materials to China to build up this construction bubble..."
These are strong words – and here are some strong images to back them up:
China's 'ghost towns' expose the myth of economic growth
Watching the Chinese New Year celebrations in Shanghai earlier this year, you'd assume the fastest growing nation on earth to be a thriving place, full of energy, excitement and hope for the new decade. But that's the China they're happy to show off.
What about the other China – the one you don't normally get to hear about? Places like...
Chenggong
Ordos
Thames Town
New South
China Mall
Chenggong – where there's no one home... Construction of this city in Yunnan province started in 2003. Seven years later this shiny new metropolis teems with pristine high-rise apartment blocks, marble tiled government buildings, state of the art high schools, a large university campus, and a CBD filled with shops, banks and municipal offices. It's got everything except for the one major ingredient a thriving city needs: people! (image source www.ft.com)
Ordos – which is deserted... Full of fancy buildings and abundant infrastructure, this Inner Mongolian city was built from the ground up in just five years and meant for 1 million inhabitants. Today, the streets are deserted. Residents of Old Ordos, 35km away, are largely unimpressed with the gleaming new city they didn't ask for and have decided to stay put. (image source: www.nytimes.com)
Thames Town – which is uninhabited... this English-themed 5bn Yuan development on the outskirts of Shanghai is a collection of Georgian and Tudor-style townhouses, low rise apartments and gated complexes, designed to house 10,000 people. The development opened in 2006. Four years later, despite a huge marketing effort, the town is uninhabited. It's now a place Chinese couples visit for a few hours to have wedding photos taken. (image source: www.psfk.com)
New South China Mall – which is empty... Opened in 2005 in the city of Dongguan, this 9.6 million square ft behemoth is the biggest shopping mall in the world, with room for 2,350 stores. It has seven 'zones' modelled on various cities and regions of the world. It also has a 25 metre high replica of the Arc de Triomphe, a 2.1 km internal canal complete with gondolas and a 553-meter long indoor-outdoor roller coaster! Trouble is, 99 percent of the stores in the so called "Great Mall of China" lie empty. (image source: www.thenational.ae)
Isn't this just the weirdest thing you've ever heard of?
Imagine: you can be walking around in the most populated country on earth and not see a single soul for weeks and months on end? Doesn't this make you just a little suspicious... or concerned?
It certainly raises several questions – which as an investor in all this you have a right to hear the answers to...
But at least now you know what happens to all
that Aussie iron ore, coal and copper!
These recently built multi-billion-dollar ghost towns should be enough to make any Aussie resource investor twitchy. Here is actual physical proof that the companies you invest in are servicing a demand that just isn't there.
But that's just the beginning of it.
I'm guessing you haven't heard about Beijing...
Like me, you probably assumed that China's capital was a bustling commercial city and had completely embraced the country's transition to a market economy...
Well, get this: currently HALF of all the commercial real estate in the centre of Beijing is vacant. We're talking about a space the size of 35,612 tennis courts – just empty.
"It does not make sense for China to build more empty buildings and add capacities in industries where you already have overcapacity. I think the Chinese economy will decelerate very substantially in 2010 and could even crash."
Marc Faber
Bloomberg Television
11/02/10
According to Jack Rodman, of Beijing Law firm King & Wood, 500 million square feet (46.5 million square meters) of commercial real estate has been developed in Beijing since 2006.
That's more than ALL the office space in Manhattan, New York City – thrown up in less than four years!
Rodman says it would take 14 years to fill the vacant offices – provided occupancy rates returned to what they were in the peak years of 2004-2006.
Now get this: in spite of the fact that half the office blocks in Beijing are empty, the Chinese authorities are adding a further 1.2 million square metres of NEW commercial space to the CBD this year!
Rodman says this 'defies logic'. He warns of a 'massive amount of oversupply' and is convinced the Beijing real estate market is about to tumble because of it.
Hedge fund manager Jim Chanos warned in January, after the Dubai debt crisis came to light that "China is Dubai times a thousand" and that "the [China] bubble could burst sooner rather than later..."
Which prompts the question:
What will happen to the Aussie firms supplying these resources to China if this real estate bubble bursts?
Right across China, vast areas of land are being made available by authorities. Construction firms are winning lucrative contracts to build new cities, communities and commercial centres. Investors are sinking massive sums into these firms and those who supply them with raw materials.
Property speculators are piling into these brand new developments in their millions. The New York Times reported in March that one Shanghai investor recently bought 54 properties in a single day – that's two and a quarter every hour!
Shanghai advertising executive Andy Xiang says: "the speed you buy a house here is faster than you buy vegetables..."
This buying fury has pushed land prices up fast. According to Standard Chartered, the average land price in China increased by 106 percent last year. That includes more than 200 percent in Shanghai, 400 percent in Guangzhou and 876 percent in Wenzhou.
"Last year a record $560 billion of residential property was sold in China, an increase of 80 percent from the year before, according to government statistics that are widely considered reliable."
David Barboza
The New York Times
March 4th 2010
Right now, apartments in the luxurious Tomson Riviera development in Shanghai sell for US$2,300 a square foot.
By comparison, the average luxury apartment in Manhattan sold for around US$1,900 a square foot in the last quarter of 2009.
This all looks impressive on paper.
But if there's no real economic need being met – isn't this just inflating a huge real estate bubble?
Professor Yu Yongding, recently retired director of the Institute of World Economics and Politics believes so. He says:
"Chinese demand just cannot keep up with the supply being created by over-investment". Worse, he says that "the Chinese government response has been to invest more money in projects that will only create even more over supply... this is an unsustainable process... [the authorities are] producing too many things the population is not demanding."
This fake demand has also pushed
Aussie stock prices up and up
Earlier I showed you the 10-year share price charts of BHP Billiton, Rio Tinto and Woodside Petroleum. You could overlay the performance stats of a hundred other Aussie resource firms and you'd see exactly the same picture over the same period – huge growth. You may have benefited from this.
Look at the bar chart on the right. Over the same period, Australia's exports to China have rocketed almost FOUR-FOLD (Source: Australian Government Dept of Foreign Affairs and Trade).
There is no coincidence here.
The Aussie economy is joined at the hip, waist and ankle to China.
Sales of raw materials to China alone are worth around $42 BILLION a year to our economy, according to the government.
The Australian resource sector provides hundreds of thousands of jobs (mining alone employs 107,000 Aussies)... good returns for shareholders (to date)... tax dollars for the government... it keeps the currency strong...
"Coal royalties paid to the NSW government have already more than doubled in the past three years, helping to push the budget back towards balance. Mining royalties now rival gambling taxes as a source of NSW government revenue, expected to boost state coffers by $1.41 billion next financial year. Coal royalties make up 95 percent of that."
Jessica Irvine
The Sydney Morning Herald
March 17th 2010
"Any reduction in [Chinese] growth will have significant implications for the Australian economy and share market. Any faltering in China's growth would exacerbate the risk to export income,"
Lonsec
March 1, 2010
Over the past 20 years, the mining sector alone has contributed over $500 billion directly to national wealth. According to The Australian, one commodity (iron ore) from one state (Western Australia) to one market (China) accounts for an incredible 10 percent of our total annual merchandise exports.
China will use this iron ore to create an estimated 880 million tonnes of steel per year by 2015, according to ABARE. That amount of steel would make 16,666 Sydney Harbour Bridges – every year!
Exports grow, money flows back, and it makes Aussies feel rich. The Rudd stimulus that helped us avoid a recession... new roads... healthcare... state budgets...
All of these have been funded by Chinese money.
Robert Gottliebsen in Business Spectator says that the Federal Government's May 2010 budget "has behind it the simple assumption: that the China boom will continue for the foreseeable future..."
He goes on:
"We have a simple blind faith in the China growth story. So far we have ignored most China warnings and we may have been right.
May it continue because we are totally unprepared for the disaster that will befall Australia if the China doubters turn out to be half right."
Michael Stutchbury, writing in The Australian, adds:I don't know about you, but I'm more than a little concerned about all this.
And I get especially nervous when I think back to what happened to the ASX in the immediate aftermath of the 2008 global financial crisis...
The warning shot that nobody heard
Most Aussies were oblivious to the 'GFC'. Australia was the only country in the western world that didn't enter a technical recession, thanks largely to Chinese demand for our resources. Basically, China bailed us out – and as a result, Australia is now entering its 19th straight year of economic expansion.
GFC Causes 37% Fall in AUD
But guess what? This did not stop investors fleeing the ASX in their droves as soon as the full extent of the financial crisis became clear.
You may not have realised this mass exodus was happening.
The Aussie dollar certainly did.
In August 2008, as the full extent of the sub-prime crisis was being realised, the AUD fell from US$0.98 – almost parity – to US$0.60 at the end of October. That's a 37% drop in the Aussie dollar in four months.
Look at the chart above right. The top line at the furthest left point represents the Aussie dollar (AUD) Vs the US dollar (USD) The chart tracks this relationship from May 2008 through August 2009. (Source: www.goldprice.org)
See what happened to the Aussie dollar at the height of the financial crisis in 2008? It fell off a cliff.
Aussie resource stocks got shellacked too. Remember that 'significant blip' I told you about earlier? This was the GFC wreaking havoc on ASX stocks – including the three I showed you before.
Mining blue chip BHP Billiton fell from $50 to almost $20 over the same time frame – a 60% loss.
The Aussie dollar is what's called a 'commodity currency'. It's strong when investors are bullish on resource stocks and weak when they lose confidence – even temporarily and for whatever reason – as you can see clearly on the chart on the previous page and the three charts I showed you earlier in this letter.
I'm getting to my point – but first, take another quick look at the chart again. See the bottom line at the furthest left point? That's the gold price in Aussie dollars. Look at its almost perfectly inverse relationship to the AUD...
That should give you a bit of a clue about one strand of my urgent China hedging strategy... details coming up...
Right, here's the rub: this 2008 meltdown happened regardless of our dependence on China and regardless of the resource story. The problem was not related to Australia at all – which is a big reason why the AUD and stocks have (pretty much) returned to pre-crisis levels.
It was a 'flight to safety' reaction to the global financial crisis and it gave our economy a fairly nasty short-term jolt.
What's my point? Simple: if an unrelated panic can have this kind of impact on our currency and stock market...
What effect would a sudden collapse of
resource exports to China have?
We're so hooked on the China growth story – and so frightened we might miss out on making a shed-load of money - we invest heavily in the Aussie firms who supply China with raw materials without really paying attention to the story behind the headlines.
Many of us have made huge 'all-in' bets on China sustaining rapid building and economic growth... either intentionally because we see a bull market we want a piece of, or unwittingly as passive investors in the share market.
We think it's a simple story about a developing country striving for prosperity... we believe demand for our resources is just going to keep going up and up... and that there's no simpler case for investment on the planet.
We can't throw our cash down quickly enough. But this is money you may be counting on to help you out in retirement.
That's why I hope you'll forgive me for being blunt:
If I am only 'half right' that this growth is politically motivated, jobs will disappear, the ASX will plummet, the Aussie dollar will nosedive and any investments you had in resource stocks could tank quickly.
"Anything that is dependent on Chinese investment demand would obviously be the most vulnerable to a Chinese growth disappointment"
Pivot Capital
It will DWARF what happened to our economy after the global financial crisis. Put simply: If resource exports to China collapsed we don't have much else to fall back on. That's why you don't want your investment cash solely in Australian stocks in the event of this kind of slowdown.
Bubbles always burst when too much money piles into the same investments at the same time. Markets overheat. They become 'overbought'. When that happens, investors can get cleaned out in the mass selloff well before they realise what's going on.
If I were you I'd urgently move some of my money out of Aussie stocks and into investments that will be largely unaffected by a China slowdown... I'd give myself an insurance policy so that the money I'm trying to grow doesn't get wiped out when this starts to unravel.
And I really do think it will happen this year.
Morgan Stanley reported on March 2nd that iron ore contract prices for 2010 are to rise by 60 percent... and it's now looking like BHP Billiton has secured an even larger rise of 100 percent! That's INSANE when you consider China is basically building ghost towns and theme parks. How many more can it build?
Mark my words: when this crash comes, it's going to hit Australia hard.
The China boom has been nothing but good news for Aussie resource investors – up to now. But it's time to re-evaluate. I know a bubble when I see one.
When I saw the shocking pictures of those Chinese ghost towns my worst fears were confirmed: Australian resources are going to build entire cities no one wants to live in. Whatever you think about the reasons behind it (and I'll give you my two cents in a second), this cannot continue.
The problem is, many Australians have made high-stakes bets that it will continue – without being in full possession of the facts.
But here's the thing:
I'm even more worried now for Australian Investors
Listen, I don't want to frighten the hell out of you. But I do want to spur you into action.
We'd all love everything we invest in to go up and up forever. But, simply, the real world isn't like that. The China boom has been great for Australia, and it probably will be again, but we're due a correction. Soon.
"China is a growth economy, but we need to be careful we are not being played as part of a longterm strategy."
Here's why China is building huge
cities no one wants to live in
The simplistic argument would be to say that China is obsessed with GDP growth. In 2009 China posted whopping GDP growth of 8.7 percent. Simply put – the more a country spends and the more it builds, the higher its GDP.
This growth has been prolific. Analysts predict China will overtake Japan as the world's second largest economy by the end of 2010. That just leaves the United States to topple. And U.S. GDP shrank by 2.4 percent in 2009.
But China's motivation isn't economic growth.
It's political stability.
China's rulers believe that if they move people from the farms to the cities and give them prosperity, they won't rise up and revolt. The authorities see economic growth as a necessary condition for political stability.
This is about the communist government hanging onto power.
A draft discussion paper, produced by delegates at the 2nd Berlin Conference on Asian Security (4/5th Oct, 2007) backs this up:
"The most important political goal of the Chinese Communist Party (CCP) is to maintain its leadership and survival as long as possible. To do so, 'economic development' and 'political stability control'... are necessary conditions"
They also report that: "[The] Chinese people support the Communist Party's rule as long as the Chinese economy improves."
That's why the ruling clique in Beijing commissioned hundreds of new housing and commercial developments, transport and infrastructure networks, even brand new cities...
"The nation's "massive monetary stimulus" risks triggering large asset-price increases, a housing bubble, and bad debts from the financing of local-government projects."
World Bank
Quarterly Report on China
"Regulators are in control of the banking industry, and have the ability to curb lending as needed."
Michael Geoghegan
CEO, HSBC Holdings Plc
That's why it poured US$585 billion into its economy in the form of a stimulus package last year. Most of this has gone into yet more infrastructure and construction projects, creating more jobs and business for building contractors and suppliers of raw materials...
That's why these eerie 'ghost-towns' are springing up all across China... And,
That's why Chinese demand for Aussie resources isn't economically motivated.
And if it isn't economically motivated, it's bogus. It can't last.
Remember – the performance of roughly 39 percent of the stocks on the ASX is hinged on China's continued economic growth. When you buy these stocks with your money, that's what you're betting on.
But this growth is not organic. It's manufactured, stage-managed and heavily controlled. The Chinese authorities can turn it on and off like a tap whenever they please to suit their political aims. That's pretty worrying if you're investing with money you're going to need in your retirement.
Yes, I know it sounds a bit 'out there' but...
On 12th February 2010 I knew my theory was right
The significance of this wasn't widely understood, but on 12th February, China's authorities quietly increased reserve ratios in its banks to 16.5 percent. According to Colleen Ryan in the Australian Financial Review, this action effectively removed US$300 billion from the Chinese economy.
You read that right: the authorities REMOVED $300 billion...
"Recent heated investment on stocks and estates among Chinese people provide another source of threat on social and political stability. Recent enormous price increase of estates worsened income and regional disparity problems and placed an enormous pressure on the living costs of ordinary people. Skyrocketing stock prices already became a political burden. If the stock market collapses... it will certainly provide a window of riots against government."
On China's Internal Stability
2nd Berlin Conference on Asian
Security, 4/5 October, 2007
This is after they'd poured $585 billion IN last year.
Why would the Chinese do that?
Well they're worried, believe it or not, about inflation. Yes, we are talking about the same country that's seemingly obsessed with rapid economic growth!
In January alone, Chinese banks loaned US$203 billion dollars. That was more than the previous three months combined and 20% of the annual target.
January producer prices were also up 4.3% over December prices... all of this sparked fears in Beijing that the economy may be starting to overheat.
The government moved swiftly. It immediately raised the capital holding requirements of Chinese banks.
This knee-jerk reaction bought the picture into sharp focus for me.
This is the skittish behaviour of a bunch of control freaks. A government that acts this quickly and decisively to keep an iron grip on its economy sends a worrying signal to anyone with a stake in China's growth.
Why is this worrying for Aussie resource investors?
Raising capital requirements means banks have less money available to lend to businesses. Yes, this is a pretty effective way to curb inflation.
But it also slows demand for credit by real estate speculators. That, in turn, puts the brakes on commercial property and fixed asset investments... and that slows demand for Australian iron ore and other resources.
That can pull stock prices down, quickly.
Bear in mind the Chinese lending boom pushed the value of some commodities UP hugely from their 2008 lows. Between March 2009 and March 2010, zinc rocketed 120%... copper soared 165%... and lead shot up 152%...
So why wouldn't the opposite be true when lending is reined in?
That's a huge concern for Aussie resource investors. But the bigger concern by far is that this secretive, paranoid, power-hungry, one-party dictatorship has Australia's prosperity over a barrel.
Do you want your future financial security determined by the irrational political whims of an overseas government?
I sure as hell don't.
That's why you need to put a hedging strategy in place quickly. I don't know when the effects of a China collapse will be felt by Aussie stocks and reflected in the value of the Aussie Dollar... I don't know how long it will take for the real estate bubble to fully deflate...
But mark my words: like all bubbles and winning streaks, this one will end.
When it does, you'll need to be prepared. Luckily for you – you will be...
I've put together a briefing detailing two investments you should move into now. I'll explain how you can get a free copy of this report in a moment – first here's a preview of what's in it...
'Exit the Dragon' Play 1: make the
RIGHT kind of gold investment
My first recommendation is that you immediately get some exposure to gold.
This shouldn't really come as a big surprise. Gold is the ultimate hedge against a drop in the value of paper currencies – in this case AUD.
I'm sure you know that in times of economic uncertainty investors flock to gold as a protective measure. Gold tends to do well when stocks fall, and vice versa, as investors take their money out of one and put it in the other depending on the prevailing market sentiment.
'Exit the Dragon' Play 2: stash your
cash in this snubbed economy
When the China buying boom slows down, one of the first currencies investors will abandon is the AUD. That's because when you take away resources there's little else of interest here to international investors.
We already saw what happened to resource stocks the last time investors dumped the Aussie dollar after the financial crisis hit. There is an even bigger risk to those stocks in the event of a China collapse.
Step number two of my hedging strategy should neutralise it...
The economy I think you should invest a portion of your portfolio in is in an entirely different position to Australia: it imports raw materials rather than exporting them. And unlike China, it uses those resources to build things people actually need. It has a HUGE manufacturing sector.
The way I see it; if China stops buying our resources, Australia has nothing to fall back on. We have precious little manufacturing – we don't even make enough to satisfy our own demand.
Aussie investors tend to follow a 'home country bias' when considering possible destinations for their cash. This is largely thanks to narrow-focussed advice from the highly ineffective luddites in the funds management industry.
Take it from me – if you're to stand any chance of protecting yourself when the China bubble bursts, you need to ditch this way of thinking - QUICKLY.
You trust these people with your super fund contributions – and they're supposed to have your best interests at heart – but it's obvious they're only concerned about two things: the commission they make on your account and how they can use you as a stepping stone to higher-networth clients.
They pour your cash into stocks without much thought given to whether these investments are right for you. Once they've spent your money they'll leave you in a position for as long as it suits them to do so.
That's not really acting with your best interests at heart.
And here's the real kicker: you're no better off
using a fund manager than just leaving your
money in the bank: OFFICIAL
According to ABC news, Between March 2000 and February 2010 the average interest rate for term deposits in Australian banks was 3.92%. The median retail super fund delivered just 3.7% in the same time! What does that tell you?
Well, today, below, I'll make a radical suggestion: you should entirely re-think the basis of Australia's epic resources bull market.
You can scroll down right now and take a look at exactly why I think this is the case if you'd like – but I'd like to take a minute or two to explain why I'm doing this...
When I brought The Daily Reckoning to Australia some four and a half years ago, I did so because I saw the single most exciting investment market in the Western world – and wanted to be a part of it.
This is where the commodities story met the China story. It was (and still is) ground zero for serious 21st century investors.
I'd watched from my posts in London and Paris as companies like BHP, RIO and Woodside made three figure gains for shareholders in a few short years. I was eager to see firsthand how the thousands of smaller, unheralded Aussie miners and explorers would benefit from unprecedented Chinese demand for Australian natural resources.
As a former small cap analyst, I knew that if you want to make really big money in a boom, going small is the way to do it. It was, professionally and personally, the best move I've ever made.
Back home in the U.S. my friends told me I was crazy. U.S. stocks were rising. U.S. house prices were rising. Why give up all that (and cheap beer to boot) to go croc hunting and koala hugging 'Down Under?'
But having written about the big picture in my newsletter at the time (Strategic Investment), I knew the American economy was a busted flush. The decision to move my publishing business thousands of kilometres to Australia remains one of my proudest (and best-timed) achievements. In investment terms, it was a good trade.
But you probably already knew that. It's been one hell of a ride for Aussie investors over the last decade. For the most part, an upward one. Even the financial crisis that devastated the rest of the developed world hasn't really bitten down hard here (at least not in an obvious way...yet).
And for that you can thank unrelenting Chinese demand.
But after analysing the situation carefully over the last year, I'm ready to make my move. And it is not a half-measure.
If you scroll down you'll see for yourself the specific, urgent action I think you need to take, right now.
I'll be honest with you. When I moved here, it was never my intention to get back in the game of writing actionable investment advice each week.
I always saw my role here as a commentator... to paint a picture for you, one which you can draw your own conclusions from.
That was a good plan, but things have changed in two ways:
First, what I see fast approaching (as soon as this year)is just too important a development to ignore for Australian investors.
Second, I've already started moving my own money to counter this global threat. This is what my recent trip to Baltimore was all about. If it was important enough for me to make a change, I reckoned it was something you might want to know about too.
A major change is coming in the global economy – one that could hit Australia especially hard – and I've personally begun preparing for it. I think you should, too.
And yes, this IS personal.
More than 50,000 Australians read The Daily Reckoning every day. Almost the same number read Money Morning.
That's more like-minds than I EVER thought we'd find here.
Call me old fashioned, but I believe like-minded friends have a duty to share their best advice with each other.
Also – your friends are usually the only people willing to tell you news you don't want to hear.
So that's what I'm doing. And why I'm doing it. I hope you'll take it in the spirit it's offered.
And I really hope you can spare a few minutes right now to have a read of my letter below – then take the action I recommend at the end.
Please understand: I wouldn't be doing this if I didn't think I was right...
My very best regards,
Dan Denning
Publisher
--------------------------------------------------------------------------------
Exit the Dragon
The investments you need to ditch now – or China's 2010 collapse could clean you out
REVEALED IN THIS MUST-READ LETTER...
Why at least ONE THIRD of your private wealth and 107,000 Aussie jobs are under imminent threat: discover why the most basic assumption behind Australia's 'miracle economy' is about to be proven catastrophically wrong... and what you stand to lose when China's real estate bubble bursts this year...
Ghost towns, theme parks and enough empty Beijing offices to fill 35,612 tennis courts: Revealed – what's REALLY driving the Chinese property boom... and why you're staking your financial future on bogus demand...
Two 'evasive' investments you need to make urgently: discover the Aussie investments you need to ditch now... and two to move your money into quickly – if you want to shelter your wealth from the fallout while everyone else comes undone...
AUTUMN 2010
Dear Friend,
When any relationship ends, it's painful.
"The worst part," said a close friend at The Lord Cardigan restaurant in Albert Park, Melbourne the other night, "isn't the break-up itself..."
"It's the moment you first realise you've been deceived."
His eyes narrowed...
"You breeze along happily, believing everything's okay, loving everything about your life... and all the while, behind the scenes, you're being duped.
"The moment you find out things aren't what you thought they were – that's what hurts the most. It's the deception. Nothing prepares you for the shock..."
I did what I thought a friend should: I offered words of condolence and support, made sure his glass was regularly topped up, and picked up the bill at the end of the night.
I felt awful: I couldn't warn my friend that the most important relationship in his life was under threat.
But I CAN warn you. You see...
Like my friend, you've been breezing along
in a relationship you think is wonderful
This relationship provides you with great returns on your private share portfolio and your super.
It gives the state you live in money to build roads, offer healthcare and provide jobs. It keeps the value of the dollar in your pocket strong. It saved Australia from a recession last year. And it has underpinned our economic growth for the past decade.
You may not even realise you're in this relationship. You may take all of the above benefits for granted.
But you are in this. EVERY Australian is.
And today I'm writing to tell you: we're being duped.
Things are not as you think they are. This relationship is on shaky ground. And today I want to reveal the extent of this deception to you before any kind of 'separation' is announced.
Because believe me, when that comes later this year, if you're not financially prepared for it, you'll need more than a free meal and a few words of condolence to see you right...
I'm talking about Australia's – and your – relationship with China.
"Ah!" You might be thinking...
"But I'm not in a relationship with China!"
Oh, but you are, whether you like it or not!
Let me show you just how strong your relationship with China is...
Take a look at the pie chart to the right. This is the ASX – the Aussie stock market – broken down into its component sectors. I've circled three sectors for you: Materials, Industrials and Energy. (Source: S&P equity indices)
These three sectors contain the stocks that have benefited most from the China building boom: exports of Aussie materials and energy, and mining operations that dig resources out of the ground to send to Chinese construction firms.
What does this mean to you?
Well, these three sectors make up 39 percent of the entire Aussie stock market. If you're an investor, the chances are that at least 39 percent of your money is being staked on China's continuing growth. In reality, it's probably way more than that.
Resource, materials, energy and mining stocks are what most half decent investment advisers, your colleagues at work, your mates down the pub – even your Granny would urge you to buy right now.
And if you leave your investment decisions to a fund manager (highly likely) your portfolio is more than likely flooded with these stocks, whether you realise it or not.
Now here's the thing about these companies you're invested in:
They are all riding high on the China boom
"Pinning our economy to China comes at a price. We believe [there will be] a slowing in demand for resources over 2010 and as a result prices will come off. Of course, with resource stocks making up almost 40 percent of the Australian stock market, this will mean a bumpy ride."
Paul Winter, Equity Strategist
Investors Mutual Limited
We pile into these stocks because of huge Chinese demand for our natural resources.
Total resource exports to China were worth AU$42,353,000,000 to the Australian economy in 2009.
That's an increase of 31 percent on the previous year.
The only other country that increased its imports of Aussie raw materials in 2009 was India – by a much smaller 7.2 percent.
All other trading partners cut their orders of Australian resources in the same 12 month period.
Look at the graph to the right. See how China has now overtaken Japan as our main trading partner. (Source: Australian Government Dept of Foreign Affairs
and Trade)
A lot of Aussie resource stocks – including many of the ones you may own – have gone up on the back of this Chinese demand. And a lot of people have made a lot of money quickly.
Check out the charts (right).
Look at the 10 year performance of leading Aussie resource stocks BHP Billiton, Rio Tinto and Woodside Petroleum (03/00 – 03/10).
These stocks have gone to the MOON over the past decade (aside from a small but significant blip I'll get to in a moment).
Bottom line: This is why your fund manager is furiously loading up on resource shares on your behalf... maybe even as you're reading this...
My advice today:
Pick up the phone.
Tell him to stop.
Why?
Because these stocks and hundreds more like them will plummet like an anvil in a Roadrunner cartoon when the China bubble bursts
Whoa there just a second...
Why would China stop buying Aussie resources? Don't the Chinese want 400 new cities by 2020? What are they going to build them out of – marshmallow?
I know this goes against the grain. The idea of China suddenly saying: "stop the cranes – we're big enough now" is fanciful to say the least.
But here's my point: I don't think they'll have a choice when their real estate bubble bursts.
My friend, there's much more to China's seemingly relentless growth than meets the eye. And that means one of the most basic assumptions behind Australia's 'miracle economy' could soon be proven catastrophically wrong. If you have even a shred of interest in your future financial security, I urge you to spare me the next five minutes of your time...
You won't read a more valuable
letter in the next 10 years
You may have already figured out what's at stake for your own wealth in the event of a China collapse. If you haven't, I'm about to spell it out for you – so you may want to pour yourself a stiff drink before you read any further.
But first I want to make a very important point:
There IS an exit strategy on the table for you today. That's why I'm writing. You can 'invest your way around' the coming storm – as long as you're a) smart and b) quick.
In this letter I'll explain exactly what you need to do now to protect your wealth from the effects of China's real estate bubble bursting. I've identified two investments that are natural hedge positions against any decline in China's imports of our natural resources. I want to tell you about them today.
Take my advice and you could avoid the hassle and heartache that most Aussie investors will stumble blindly into (because they don't know it's coming). Better than that: you should even turn a PROFIT while everyone else is struggling to make sense of what's going on.
Let me be absolutely clear: you will not get this warning anywhere else. Too many people in the financial services industry have a vested interest in the China growth story. The last thing they want you to do is move any money out of Aussie resource stocks.
But I'm 100% independent, I don't have a vested interest in your cash, plus I have a track record for spotting this kind of thing. I'll explain more about me, and my 'Exit the Dragon' strategy in a moment. First, you need to know:
Why much of the demand for Aussie resources you've built your investment strategy around is BOGUS
I said earlier that one of the most basic assumptions behind Australia's 'miracle economy' is about to be proven wrong.
The assumption is that China is hooked on economic growth.
It isn't. If you take only one thing away from this letter, let it be this: China's expansion is POLITICALLY – not economically – motivated. This is NOT about economic growth; it's about political stability... stability at ANY cost.
"It [has become] rational for [Chinese]state and non-state actors to spend much more effort on politics and much less effort calculating market risks and rewards."
Robert Gottliebsen
Business Spectator
This finally became clear to me on 12th February this year. The Chinese showed their hand – and the alarm bells began clanging. Right now they're clanging louder than the chimes of St. Peter's Basilica at midnight on Christmas Eve.
My message to you today is clear:
You are gambling your returns – maybe even your retirement security – on the political whims of an irrational overseas communist government.
This bogus demand for resources has created a real estate bubble in China.
James Rickards, former general counsel of hedge fund Long-Term Capital Management calls it "the greatest bubble in history with the most massive misallocation of wealth..."
Stephen Green, an economist at International Bank says: "We believe we now have a bubble in many [Chinese] cities, particularly the big ones..."
Jim Chanos, President of Kynikos Associates says: "I see all the signs of a credit induced real estate bubble that I think is going to be a doozy..." Worryingly, he concludes: "I'd be very leery of companies who are exporting materials to China to build up this construction bubble..."
These are strong words – and here are some strong images to back them up:
China's 'ghost towns' expose the myth of economic growth
Watching the Chinese New Year celebrations in Shanghai earlier this year, you'd assume the fastest growing nation on earth to be a thriving place, full of energy, excitement and hope for the new decade. But that's the China they're happy to show off.
What about the other China – the one you don't normally get to hear about? Places like...
Chenggong
Ordos
Thames Town
New South
China Mall
Chenggong – where there's no one home... Construction of this city in Yunnan province started in 2003. Seven years later this shiny new metropolis teems with pristine high-rise apartment blocks, marble tiled government buildings, state of the art high schools, a large university campus, and a CBD filled with shops, banks and municipal offices. It's got everything except for the one major ingredient a thriving city needs: people! (image source www.ft.com)
Ordos – which is deserted... Full of fancy buildings and abundant infrastructure, this Inner Mongolian city was built from the ground up in just five years and meant for 1 million inhabitants. Today, the streets are deserted. Residents of Old Ordos, 35km away, are largely unimpressed with the gleaming new city they didn't ask for and have decided to stay put. (image source: www.nytimes.com)
Thames Town – which is uninhabited... this English-themed 5bn Yuan development on the outskirts of Shanghai is a collection of Georgian and Tudor-style townhouses, low rise apartments and gated complexes, designed to house 10,000 people. The development opened in 2006. Four years later, despite a huge marketing effort, the town is uninhabited. It's now a place Chinese couples visit for a few hours to have wedding photos taken. (image source: www.psfk.com)
New South China Mall – which is empty... Opened in 2005 in the city of Dongguan, this 9.6 million square ft behemoth is the biggest shopping mall in the world, with room for 2,350 stores. It has seven 'zones' modelled on various cities and regions of the world. It also has a 25 metre high replica of the Arc de Triomphe, a 2.1 km internal canal complete with gondolas and a 553-meter long indoor-outdoor roller coaster! Trouble is, 99 percent of the stores in the so called "Great Mall of China" lie empty. (image source: www.thenational.ae)
Isn't this just the weirdest thing you've ever heard of?
Imagine: you can be walking around in the most populated country on earth and not see a single soul for weeks and months on end? Doesn't this make you just a little suspicious... or concerned?
It certainly raises several questions – which as an investor in all this you have a right to hear the answers to...
But at least now you know what happens to all
that Aussie iron ore, coal and copper!
These recently built multi-billion-dollar ghost towns should be enough to make any Aussie resource investor twitchy. Here is actual physical proof that the companies you invest in are servicing a demand that just isn't there.
But that's just the beginning of it.
I'm guessing you haven't heard about Beijing...
Like me, you probably assumed that China's capital was a bustling commercial city and had completely embraced the country's transition to a market economy...
Well, get this: currently HALF of all the commercial real estate in the centre of Beijing is vacant. We're talking about a space the size of 35,612 tennis courts – just empty.
"It does not make sense for China to build more empty buildings and add capacities in industries where you already have overcapacity. I think the Chinese economy will decelerate very substantially in 2010 and could even crash."
Marc Faber
Bloomberg Television
11/02/10
According to Jack Rodman, of Beijing Law firm King & Wood, 500 million square feet (46.5 million square meters) of commercial real estate has been developed in Beijing since 2006.
That's more than ALL the office space in Manhattan, New York City – thrown up in less than four years!
Rodman says it would take 14 years to fill the vacant offices – provided occupancy rates returned to what they were in the peak years of 2004-2006.
Now get this: in spite of the fact that half the office blocks in Beijing are empty, the Chinese authorities are adding a further 1.2 million square metres of NEW commercial space to the CBD this year!
Rodman says this 'defies logic'. He warns of a 'massive amount of oversupply' and is convinced the Beijing real estate market is about to tumble because of it.
Hedge fund manager Jim Chanos warned in January, after the Dubai debt crisis came to light that "China is Dubai times a thousand" and that "the [China] bubble could burst sooner rather than later..."
Which prompts the question:
What will happen to the Aussie firms supplying these resources to China if this real estate bubble bursts?
Right across China, vast areas of land are being made available by authorities. Construction firms are winning lucrative contracts to build new cities, communities and commercial centres. Investors are sinking massive sums into these firms and those who supply them with raw materials.
Property speculators are piling into these brand new developments in their millions. The New York Times reported in March that one Shanghai investor recently bought 54 properties in a single day – that's two and a quarter every hour!
Shanghai advertising executive Andy Xiang says: "the speed you buy a house here is faster than you buy vegetables..."
This buying fury has pushed land prices up fast. According to Standard Chartered, the average land price in China increased by 106 percent last year. That includes more than 200 percent in Shanghai, 400 percent in Guangzhou and 876 percent in Wenzhou.
"Last year a record $560 billion of residential property was sold in China, an increase of 80 percent from the year before, according to government statistics that are widely considered reliable."
David Barboza
The New York Times
March 4th 2010
Right now, apartments in the luxurious Tomson Riviera development in Shanghai sell for US$2,300 a square foot.
By comparison, the average luxury apartment in Manhattan sold for around US$1,900 a square foot in the last quarter of 2009.
This all looks impressive on paper.
But if there's no real economic need being met – isn't this just inflating a huge real estate bubble?
Professor Yu Yongding, recently retired director of the Institute of World Economics and Politics believes so. He says:
"Chinese demand just cannot keep up with the supply being created by over-investment". Worse, he says that "the Chinese government response has been to invest more money in projects that will only create even more over supply... this is an unsustainable process... [the authorities are] producing too many things the population is not demanding."
This fake demand has also pushed
Aussie stock prices up and up
Earlier I showed you the 10-year share price charts of BHP Billiton, Rio Tinto and Woodside Petroleum. You could overlay the performance stats of a hundred other Aussie resource firms and you'd see exactly the same picture over the same period – huge growth. You may have benefited from this.
Look at the bar chart on the right. Over the same period, Australia's exports to China have rocketed almost FOUR-FOLD (Source: Australian Government Dept of Foreign Affairs and Trade).
There is no coincidence here.
The Aussie economy is joined at the hip, waist and ankle to China.
Sales of raw materials to China alone are worth around $42 BILLION a year to our economy, according to the government.
The Australian resource sector provides hundreds of thousands of jobs (mining alone employs 107,000 Aussies)... good returns for shareholders (to date)... tax dollars for the government... it keeps the currency strong...
"Coal royalties paid to the NSW government have already more than doubled in the past three years, helping to push the budget back towards balance. Mining royalties now rival gambling taxes as a source of NSW government revenue, expected to boost state coffers by $1.41 billion next financial year. Coal royalties make up 95 percent of that."
Jessica Irvine
The Sydney Morning Herald
March 17th 2010
"Any reduction in [Chinese] growth will have significant implications for the Australian economy and share market. Any faltering in China's growth would exacerbate the risk to export income,"
Lonsec
March 1, 2010
Over the past 20 years, the mining sector alone has contributed over $500 billion directly to national wealth. According to The Australian, one commodity (iron ore) from one state (Western Australia) to one market (China) accounts for an incredible 10 percent of our total annual merchandise exports.
China will use this iron ore to create an estimated 880 million tonnes of steel per year by 2015, according to ABARE. That amount of steel would make 16,666 Sydney Harbour Bridges – every year!
Exports grow, money flows back, and it makes Aussies feel rich. The Rudd stimulus that helped us avoid a recession... new roads... healthcare... state budgets...
All of these have been funded by Chinese money.
Robert Gottliebsen in Business Spectator says that the Federal Government's May 2010 budget "has behind it the simple assumption: that the China boom will continue for the foreseeable future..."
He goes on:
"We have a simple blind faith in the China growth story. So far we have ignored most China warnings and we may have been right.
May it continue because we are totally unprepared for the disaster that will befall Australia if the China doubters turn out to be half right."
Michael Stutchbury, writing in The Australian, adds:
And I get especially nervous when I think back to what happened to the ASX in the immediate aftermath of the 2008 global financial crisis...
The warning shot that nobody heard
Most Aussies were oblivious to the 'GFC'. Australia was the only country in the western world that didn't enter a technical recession, thanks largely to Chinese demand for our resources. Basically, China bailed us out – and as a result, Australia is now entering its 19th straight year of economic expansion.
GFC Causes 37% Fall in AUD
But guess what? This did not stop investors fleeing the ASX in their droves as soon as the full extent of the financial crisis became clear.
You may not have realised this mass exodus was happening.
The Aussie dollar certainly did.
In August 2008, as the full extent of the sub-prime crisis was being realised, the AUD fell from US$0.98 – almost parity – to US$0.60 at the end of October. That's a 37% drop in the Aussie dollar in four months.
Look at the chart above right. The top line at the furthest left point represents the Aussie dollar (AUD) Vs the US dollar (USD) The chart tracks this relationship from May 2008 through August 2009. (Source: www.goldprice.org)
See what happened to the Aussie dollar at the height of the financial crisis in 2008? It fell off a cliff.
Aussie resource stocks got shellacked too. Remember that 'significant blip' I told you about earlier? This was the GFC wreaking havoc on ASX stocks – including the three I showed you before.
Mining blue chip BHP Billiton fell from $50 to almost $20 over the same time frame – a 60% loss.
The Aussie dollar is what's called a 'commodity currency'. It's strong when investors are bullish on resource stocks and weak when they lose confidence – even temporarily and for whatever reason – as you can see clearly on the chart on the previous page and the three charts I showed you earlier in this letter.
I'm getting to my point – but first, take another quick look at the chart again. See the bottom line at the furthest left point? That's the gold price in Aussie dollars. Look at its almost perfectly inverse relationship to the AUD...
That should give you a bit of a clue about one strand of my urgent China hedging strategy... details coming up...
Right, here's the rub: this 2008 meltdown happened regardless of our dependence on China and regardless of the resource story. The problem was not related to Australia at all – which is a big reason why the AUD and stocks have (pretty much) returned to pre-crisis levels.
It was a 'flight to safety' reaction to the global financial crisis and it gave our economy a fairly nasty short-term jolt.
What's my point? Simple: if an unrelated panic can have this kind of impact on our currency and stock market...
What effect would a sudden collapse of
resource exports to China have?
We're so hooked on the China growth story – and so frightened we might miss out on making a shed-load of money - we invest heavily in the Aussie firms who supply China with raw materials without really paying attention to the story behind the headlines.
Many of us have made huge 'all-in' bets on China sustaining rapid building and economic growth... either intentionally because we see a bull market we want a piece of, or unwittingly as passive investors in the share market.
We think it's a simple story about a developing country striving for prosperity... we believe demand for our resources is just going to keep going up and up... and that there's no simpler case for investment on the planet.
We can't throw our cash down quickly enough. But this is money you may be counting on to help you out in retirement.
That's why I hope you'll forgive me for being blunt:
If I am only 'half right' that this growth is politically motivated, jobs will disappear, the ASX will plummet, the Aussie dollar will nosedive and any investments you had in resource stocks could tank quickly.
"Anything that is dependent on Chinese investment demand would obviously be the most vulnerable to a Chinese growth disappointment"
Pivot Capital
It will DWARF what happened to our economy after the global financial crisis. Put simply: If resource exports to China collapsed we don't have much else to fall back on. That's why you don't want your investment cash solely in Australian stocks in the event of this kind of slowdown.
Bubbles always burst when too much money piles into the same investments at the same time. Markets overheat. They become 'overbought'. When that happens, investors can get cleaned out in the mass selloff well before they realise what's going on.
If I were you I'd urgently move some of my money out of Aussie stocks and into investments that will be largely unaffected by a China slowdown... I'd give myself an insurance policy so that the money I'm trying to grow doesn't get wiped out when this starts to unravel.
And I really do think it will happen this year.
Morgan Stanley reported on March 2nd that iron ore contract prices for 2010 are to rise by 60 percent... and it's now looking like BHP Billiton has secured an even larger rise of 100 percent! That's INSANE when you consider China is basically building ghost towns and theme parks. How many more can it build?
Mark my words: when this crash comes, it's going to hit Australia hard.
The China boom has been nothing but good news for Aussie resource investors – up to now. But it's time to re-evaluate. I know a bubble when I see one.
When I saw the shocking pictures of those Chinese ghost towns my worst fears were confirmed: Australian resources are going to build entire cities no one wants to live in. Whatever you think about the reasons behind it (and I'll give you my two cents in a second), this cannot continue.
The problem is, many Australians have made high-stakes bets that it will continue – without being in full possession of the facts.
But here's the thing:
I'm even more worried now for Australian Investors
Listen, I don't want to frighten the hell out of you. But I do want to spur you into action.
We'd all love everything we invest in to go up and up forever. But, simply, the real world isn't like that. The China boom has been great for Australia, and it probably will be again, but we're due a correction. Soon.
"China is a growth economy, but we need to be careful we are not being played as part of a longterm strategy."
Here's why China is building huge
cities no one wants to live in
The simplistic argument would be to say that China is obsessed with GDP growth. In 2009 China posted whopping GDP growth of 8.7 percent. Simply put – the more a country spends and the more it builds, the higher its GDP.
This growth has been prolific. Analysts predict China will overtake Japan as the world's second largest economy by the end of 2010. That just leaves the United States to topple. And U.S. GDP shrank by 2.4 percent in 2009.
But China's motivation isn't economic growth.
It's political stability.
China's rulers believe that if they move people from the farms to the cities and give them prosperity, they won't rise up and revolt. The authorities see economic growth as a necessary condition for political stability.
This is about the communist government hanging onto power.
A draft discussion paper, produced by delegates at the 2nd Berlin Conference on Asian Security (4/5th Oct, 2007) backs this up:
"The most important political goal of the Chinese Communist Party (CCP) is to maintain its leadership and survival as long as possible. To do so, 'economic development' and 'political stability control'... are necessary conditions"
They also report that: "[The] Chinese people support the Communist Party's rule as long as the Chinese economy improves."
That's why the ruling clique in Beijing commissioned hundreds of new housing and commercial developments, transport and infrastructure networks, even brand new cities...
"The nation's "massive monetary stimulus" risks triggering large asset-price increases, a housing bubble, and bad debts from the financing of local-government projects."
World Bank
Quarterly Report on China
"Regulators are in control of the banking industry, and have the ability to curb lending as needed."
Michael Geoghegan
CEO, HSBC Holdings Plc
That's why it poured US$585 billion into its economy in the form of a stimulus package last year. Most of this has gone into yet more infrastructure and construction projects, creating more jobs and business for building contractors and suppliers of raw materials...
That's why these eerie 'ghost-towns' are springing up all across China... And,
That's why Chinese demand for Aussie resources isn't economically motivated.
And if it isn't economically motivated, it's bogus. It can't last.
Remember – the performance of roughly 39 percent of the stocks on the ASX is hinged on China's continued economic growth. When you buy these stocks with your money, that's what you're betting on.
But this growth is not organic. It's manufactured, stage-managed and heavily controlled. The Chinese authorities can turn it on and off like a tap whenever they please to suit their political aims. That's pretty worrying if you're investing with money you're going to need in your retirement.
Yes, I know it sounds a bit 'out there' but...
On 12th February 2010 I knew my theory was right
The significance of this wasn't widely understood, but on 12th February, China's authorities quietly increased reserve ratios in its banks to 16.5 percent. According to Colleen Ryan in the Australian Financial Review, this action effectively removed US$300 billion from the Chinese economy.
You read that right: the authorities REMOVED $300 billion...
"Recent heated investment on stocks and estates among Chinese people provide another source of threat on social and political stability. Recent enormous price increase of estates worsened income and regional disparity problems and placed an enormous pressure on the living costs of ordinary people. Skyrocketing stock prices already became a political burden. If the stock market collapses... it will certainly provide a window of riots against government."
On China's Internal Stability
2nd Berlin Conference on Asian
Security, 4/5 October, 2007
This is after they'd poured $585 billion IN last year.
Why would the Chinese do that?
Well they're worried, believe it or not, about inflation. Yes, we are talking about the same country that's seemingly obsessed with rapid economic growth!
In January alone, Chinese banks loaned US$203 billion dollars. That was more than the previous three months combined and 20% of the annual target.
January producer prices were also up 4.3% over December prices... all of this sparked fears in Beijing that the economy may be starting to overheat.
The government moved swiftly. It immediately raised the capital holding requirements of Chinese banks.
This knee-jerk reaction bought the picture into sharp focus for me.
This is the skittish behaviour of a bunch of control freaks. A government that acts this quickly and decisively to keep an iron grip on its economy sends a worrying signal to anyone with a stake in China's growth.
Why is this worrying for Aussie resource investors?
Raising capital requirements means banks have less money available to lend to businesses. Yes, this is a pretty effective way to curb inflation.
But it also slows demand for credit by real estate speculators. That, in turn, puts the brakes on commercial property and fixed asset investments... and that slows demand for Australian iron ore and other resources.
That can pull stock prices down, quickly.
Bear in mind the Chinese lending boom pushed the value of some commodities UP hugely from their 2008 lows. Between March 2009 and March 2010, zinc rocketed 120%... copper soared 165%... and lead shot up 152%...
So why wouldn't the opposite be true when lending is reined in?
That's a huge concern for Aussie resource investors. But the bigger concern by far is that this secretive, paranoid, power-hungry, one-party dictatorship has Australia's prosperity over a barrel.
Do you want your future financial security determined by the irrational political whims of an overseas government?
I sure as hell don't.
That's why you need to put a hedging strategy in place quickly. I don't know when the effects of a China collapse will be felt by Aussie stocks and reflected in the value of the Aussie Dollar... I don't know how long it will take for the real estate bubble to fully deflate...
But mark my words: like all bubbles and winning streaks, this one will end.
When it does, you'll need to be prepared. Luckily for you – you will be...
I've put together a briefing detailing two investments you should move into now. I'll explain how you can get a free copy of this report in a moment – first here's a preview of what's in it...
'Exit the Dragon' Play 1: make the
RIGHT kind of gold investment
My first recommendation is that you immediately get some exposure to gold.
This shouldn't really come as a big surprise. Gold is the ultimate hedge against a drop in the value of paper currencies – in this case AUD.
I'm sure you know that in times of economic uncertainty investors flock to gold as a protective measure. Gold tends to do well when stocks fall, and vice versa, as investors take their money out of one and put it in the other depending on the prevailing market sentiment.
'Exit the Dragon' Play 2: stash your
cash in this snubbed economy
When the China buying boom slows down, one of the first currencies investors will abandon is the AUD. That's because when you take away resources there's little else of interest here to international investors.
We already saw what happened to resource stocks the last time investors dumped the Aussie dollar after the financial crisis hit. There is an even bigger risk to those stocks in the event of a China collapse.
Step number two of my hedging strategy should neutralise it...
The economy I think you should invest a portion of your portfolio in is in an entirely different position to Australia: it imports raw materials rather than exporting them. And unlike China, it uses those resources to build things people actually need. It has a HUGE manufacturing sector.
The way I see it; if China stops buying our resources, Australia has nothing to fall back on. We have precious little manufacturing – we don't even make enough to satisfy our own demand.
Aussie investors tend to follow a 'home country bias' when considering possible destinations for their cash. This is largely thanks to narrow-focussed advice from the highly ineffective luddites in the funds management industry.
Take it from me – if you're to stand any chance of protecting yourself when the China bubble bursts, you need to ditch this way of thinking - QUICKLY.
You trust these people with your super fund contributions – and they're supposed to have your best interests at heart – but it's obvious they're only concerned about two things: the commission they make on your account and how they can use you as a stepping stone to higher-networth clients.
They pour your cash into stocks without much thought given to whether these investments are right for you. Once they've spent your money they'll leave you in a position for as long as it suits them to do so.
That's not really acting with your best interests at heart.
And here's the real kicker: you're no better off
using a fund manager than just leaving your
money in the bank: OFFICIAL
According to ABC news, Between March 2000 and February 2010 the average interest rate for term deposits in Australian banks was 3.92%. The median retail super fund delivered just 3.7% in the same time! What does that tell you?
Um, what can I say, Maybey I TOLD YOU SO. I am glad to finally read an article that perhaps is on the harsh side of the reality but none the less is on the right side of reality. One thing you didn't mention is the correlation to Australia Housing prices which obviously will be affected. Less oney more problems. I hope we are wrong as it will blow up the apple cart and the apple well it's just plain rotten.
ReplyDeleteNews coming from China CCTV last night alluded to problems with Shanghai property developers starting to see signs of a slowing demand and are having problems selling.
ReplyDeleteThe choice of renting out a hotel is always an option. However, in doing so, the expense of this might ruin your entire budget. There are residences in New York which can be rented out for a temporary stay but if you want to feel homey then the perfect place to stay in is an luxury apartment. With this, it is like you have never left your home while enjoying whatever there is in New York.
ReplyDelete